U.S. may require more mortgage insurance

Obama, FHFA outline possible help for underwater borrowers

By

RonaldD. Orol

WASHINGTON (MarketWatch) — The regulator for Fannie Mae and Freddie Mac on Monday said the agency may force more borrowers to obtain private mortgage insurance as he also laid out further details about ideas he is considering to expand an Obama administration mortgage refinance program.

At issue is the extent to which Freddie and Fannie require private mortgage insurance for loans the firms guarantee. The two companies, which were seized by the government during the height of the financial crisis, typically require borrowers to obtain some form of private mortgage insurance if they make downpayments that are less than 20% of the value of the home they are buying.

For example, a borrower that makes a $10,000 downpayment — 5% down on a $200,000 home — must currently obtain mortgage insurance, while a borrower who puts $40,000 down on the same house doesn’t.

Federal Housing Finance Agency acting chief Edward DeMarco said in a speech at the American Mortgage Conference in Raleigh, N.C. that the agency will be considering a number of alternatives, such as hiking private mortgage insurance,to limit costs to taxpayers from Fannie and Freddie. Already the two firms have cost taxpayers some $130 billion.

DeMarco’s comments come as President Barack Obama discussed limiting costs to taxpayers from Fannie and Freddie as part of a broader deficit reduction plan released Monday. In his plan, Obama reiterated the government’s goal of gradually hiking the fees that Fannie and Freddie charge for guaranteeing home loans sold to investors. Obama said that this fee hike will help reimburse taxpayers for their assistance. The goal is also to drive investors to once again buy private-label residential mortgage-backed securities.

In his speech, DeMarco said the guarantee fee hike “will not happen immediately but should be expected in 2012, with some prior announcement.”

In addition, DeMarco discussed ways the agency could expand an expand an existing program that seeks to refinance mortgages. Obama also outlined the White House effort in this area as part of his deficit reduction proposal, following up on comments he made on Sept. 8 as part of a broader speech on the economy and jobs. Read about Obama's deficit reduction plan

At issue is the White House’s Home Affordable Refinance Program, or HARP, which seeks to provide refinancing options to millions of underwater borrowers who have no equity in their homes as long as their mortgage is backed by Fannie and Freddie. The program has only helped roughly 838,000 borrowers as of June 30, with millions more underwater.

DeMarco said the agency is considering a number of options to encourage more borrower and lender participation, including the possibility of limiting or eliminating risk fees that Fannie and Freddie charge on HARP refinancings.

These fees are also known as “loan level price adjustments” and have been charged to offset losses Fannie and Freddie accumulate in cases when HARP loans go into default. The fees are typically passed on to borrowers in the form of slightly higher interest rates on their loans.

“Loan level price adjustments, representations and warranties... and portability of mortgage insurance coverage are among the matters being considered,” he said.

By saying the agency is consider “representation and warranties,” DeMarco indicated that the agency could seek to try and encourage more lender participation in HARP by offering to indemnify or limit banks’ “reps and warranties” risk when it comes to loans refinanced in the program.

Also known as put-back risk, in this context, is the possibility that the loan originator will have to repurchase the loan from Fannie and Freddie because the underwriting violated the two mortgage giants’ guidelines.

Observers contend that this kind of “put-back” relief would encourage lenders to invest in more underwater refinancings but critics argue that it also have the potential to pile up losses on Fannie and Freddie and taxpayers.

DeMarco also said the agency is looking at whether they can allow the borrower refinancing their loan to keep the same private mortgage insurance they had before the re-fi. Currently, the borrower must obtain new private mortgage insurance when they refinance the loan, at an additional cost.

DeMarco said the agency is also considering allowing for even more heavily underwater borrowers, those not currently eligible for the program, to participate. As it stands now, HARP only allows borrowers to refinance at current low interest rates into a mortgage that is at most 25% more than their home’s current value. The FHFA said Sept. 9 that it was considering such a move. However, DeMarco said there were several challenges with such an expansion and that the outcome of this review is “uncertain.” Read about how a quarter of U.S. mortgages could get help

A J.P. Morgan report Monday predicted the FHFA’s first focus to expand HARP will be to assist this class of super-underwater borrowers.

“Given this focus on high [loan-to-value] borrowers, we believe the first wave of changes will include lifting the 125 LTV limit,” the report said.

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